SECTOR ASSESSMENT (SUMMARY): MICRO, SMALL, AND MEDIUM-SIZED ENTERPRISE DEVELOPMENT

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1 Women s Entrepreneurship Support Sector Development Program (RRP ARM 45230) SECTOR ASSESSMENT (SUMMARY): MICRO, SMALL, AND MEDIUM-SIZED ENTERPRISE DEVELOPMENT A. Overview 1. Significance of micro, small, and medium-sized enterprises. Since 2011, 1 the Government of Armenia has defined micro, small, and medium-sized enterprises (MSMEs) in harmony with European Union regulations. MSMEs are defined by the number of employees and at least one of the financial criteria outlined in the table below. The MSME sector dominates the Armenian economy. In 2011 there were around 150,000 registered MSMEs, of which about 60.0% (90,000) were active. 2 They represent 98.5% of businesses, generate 43.0% of the country s gross domestic product, and account for 42.5% of employment. 3 Definition of Micro, Small, and Medium-Sized Enterprises Criterion Micro Small Medium Large Number of employees <10 <50 <250 <250+ Annual turnover (AMD million) ,500 1,500+ Annual balance sheet total (AMD million) ,000 1, Women s micro, small, and medium-sized enterprises. Women represent 51% of the Armenian population. There is no legal definition for women s MSMEs. The draft National Strategy for Small and Medium Entrepreneurship Development (2012) defines women s business as an enterprise managed by a woman or with at least 30% shareholding participation. This definition has not been adopted, nor is it widely used data on women business is not regularly tracked, and there seems to be a sizeable number of unlicensed establishments. Thus it is difficult to estimate the exact number of women s MSMEs. In 2011, using a definition of at least 50% ownership, women s MSMEs were estimated at 11% of the total number of registered active businesses, which would bring the number to around 9,900. Other more conservative estimates put the number of at Of the 13,600 new MSMEs registered in 2010, only 3% were established by women, far from the government s target of 20% for Women s economic participation is low and has been declining since Female labor force participation rates declined from 65% in 2001 to 54% in During the same period the gender gap the difference between male and female labor force participation has increased from 14 percentage points to 20 percentage points. The female unemployment rate, at 21.2% (2010), is higher than that of males. Thus, while women s educational achievements are on a par with those of their male counterparts, this is not translating into greater economic opportunities. International studies and experience 5 recognize that women have the potential to be a significant entrepreneurial force, contributing to increased economic growth and development. In Armenia only 4.0% of employers are women, and they represent 41.0% of the self-employed, primarily in the informal sector. While the National Statistics Office does not provide sex-disaggregated data on entrepreneurship by sector, data on employment shows that women predominate in agriculture, education, health, and social services. Focus group discussions held as part of project preparation indicate that most women s businesses are in agribusiness and food production, retail trade, restaurants, and services. These sectors have low barriers to entry 1 Republic of Armenia Law on State Support to Small and Medium Enterprise (from 5 December 2000, and amended in 2010). Before 2011 the definition was based on the number of employees and was sector dependent. 2 Small and Medium Entrepreneurship Development National Center (SME DNC) estimates. 3 SME DNC Small and Medium Entrepreneurship Sector in Armenia , Sixth Edition. Yerevan. 4 SME DNC and International Labour Organization (ILO) Women Entrepreneurship Assessment in Armenia. Based on a survey of 135 respondents. 5 World Bank World Development Report: Gender Equality and Development. Washington, DC.

2 2 and low financial risk, and could be the result of financial and skills constraints, market uncertainty, and female aversion to risk taking. The majority of women s enterprises are sole proprietorships, although family businesses prevail in the agriculture sector. Women tend to participate in ownership structures but do not have significant control over business assets and are not actively involved in management, with the exception of agriculture businesses. Few companies have female board members or high-level managers. 6 B. Issues and constraints 4. Women s businesses have some differentiating features that affect the way they conduct business and their outcomes. Understanding these challenges and identifying market or government failures will help promote in Armenia, which in turn will contribute to both increased economic competitiveness and social inclusion. 5. Sector concentration. As noted above (para. 3), women's businesses appear to be concentrated in agriculture and food production, retail trade, restaurants, and services. 7 Research shows that differences in economic sectors of operation and size of firm contribute significantly to average productivity differences between male and female businesses Cultural factors. Armenia is a patriarchal society, where social expectations, norms, and values regarding the role of women and family act as a barrier to women s expectations, entrepreneurial choices, and outcomes. There is equality according to law but social stereotypes prevent women from engaging in business. Role models to inspire and motivate, and mentors to support the process, can be powerful tools to overcome this barrier. 7. Access to finance. Financial intermediation in Armenia is low by regional standards. 9 Borrowing and lending are supported by a large-coverage credit information bureau and by collateral and bankruptcy laws. Armenia s doing business ranking on resolving insolvency, 10 however, shows that time, costs, and outcomes of insolvency proceedings need further strengthening and that arbitrage options for commercial resolutions are at a nascent stage. Improving these elements would enhance the enabling environment for secured lending that would benefit women borrowers. Leasing is only gradually being introduced. Despite significant credit growth in recent years, banks and other financial institutions generally prefer larger clients because of the lower transaction costs and greater availability of collateral. 11 This affects women disproportionately as they tend to be concentrated in smaller firms and have more limited access to collateral. Access to credit for starting a business was a critical concern for women businesses participating in focus group discussions during preparation of the project. Their limited access to the appropriate type of collateral and the lack of confidence of loan officers in women s managerial skills were often cited. Banks also tend to have less experience in lending to women, which limits learning about their potential performance as borrowers and perceiving them as a profitable segment. In some cases, although credit may be available, pricing and product design do not meet the needs of this target group. A loan guarantee scheme, administered by the Small and Medium Entrepreneurship National Development Center (SME DNC), plays an important role for start-up companies. Around 6 World Bank Enterprise Surveys: Armenia, Washington, DC. 7 SME DNC and ILO Women Entrepreneurship Assessment in Armenia, and observations from focus groups discussions. 8 Footnote 5, p Financial Analysis (accessible from list of linked documents in Appendix 2). 10 Footnote 5, Armenia is ranked 62nd out of 183 countries (56th in 2011). 11 A higher percentage of loans need collateral in Armenia (86%) compared to in other countries in the region, although the value of collateral required as a percentage of the loan amount (96%) is amongst the lowest in the region (footnote 6).

3 3 10% 20% of its beneficiaries in the period between 2007 and 2011 were women s MSMEs Networking opportunities. There are gender differences in networking behavior as women's networks tend to be smaller, more homogeneous, and with less outreach. Women also tend to spend less time networking than their male counterparts, mainly due to family responsibilities and limited spatial and social mobility. Cultural norms limit the possibility of establishing informal networking contacts with male peers. Information and communication technology (ICT) tools have significant potential to remove some of those constraints. 9. Limited business skills, business experience, and knowledge. Creating and growing a business requires managerial competence and experience, as well as external support, to increase a firm s productivity. In Armenia, the majority of women who enter into business do so out of necessity. 13 Women tend to have weaker managerial and business skills as they are often educated in less business-relevant fields, have lower financial knowledge and awareness, and more limited business experience, which is also affected by their discontinuous careers. 10. Limited access to training and business development services. The Armenian market for training and business support services exhibits a number of weaknesses. There is limited availability of quality business support organizations, and they tend to be located in Yerevan. Moreover, women often criticize the type of training available in the market as superficial, theoretical, and useless for their needs Access to information. Women lack access to information on government actions and programs, market opportunities, suppliers, competitors, technology, financing sources, and on how to start and run a business. There is no systematic way to access this information. Again, ICTs could help bridge the accessibility gap for many women. 12. Business environment. The costs of doing business tend to be higher for small firms where more women's businesses are concentrated that operate with more limited economies of scale. Operating a business is hampered by the oligopolistic structure of the market. The regulatory environment is being improved through the Regulatory Guillotine Initiative 15 which is reviewing and streamlining business regulations. Simplified electronic systems for business registration and paying taxes will also contribute to an improved business environment and will particularly benefit women s MSMEs (as these women have less time given their dual role inside and outside of their homes), and especially those located outside Yerevan. Compliance with tax requirements is one of the biggest administrative burdens for Armenian firms, in particular dealing with inspections and informal payments. 16 C. Government Strategy 13. The government s industrial policy is focused on diversifying production, increasing its range of exports, and improving productivity. In this context, SME development is a key government priority, reflected in the law on State Support to Small and Medium Enterprises (footnote 1), yearly action plans, and annual budget allocations to the SME DNC. The SME DNC 12 Some of its design features, however, have limited the use of this tool, which was recently reviewed to improve effectiveness and outreach. 13 United States Agency for International Development gender assessment citing B. Wistrand Women Empowerment and Cooperation in Armenia with a Focus on the Syunik region. Yerevan: p Interviews held during project preparation and in B. Wistrand Women empowerment and cooperation in Armenia with a focus on the Syunik region. Yerevan. 15 Supported by several development partners including the Organization for Security and Co-operation in Europe, the World Bank, and the United Nations Development Programme. 16 World Bank. Doing Business Armenia. On paying taxes, Armenia ranks 153rd of 183 economies surveyed.

4 4 is the key government institution responsible for MSME promotion through direct and indirect financial and technical assistance. In support of MSME development, a National Strategy for Small and Medium Entrepreneurship Development has recently been drafted. 17 MSME development priorities have focused on supporting start-up enterprises and promoting MSMEs in remote and frontier regions. Priority sectors include agriculture, new technologies including ICT, tourism, renewable energy, and energy efficiency initiatives, as well as arts, fashion, and jewelry. 14. Support from the government includes financial and technical assistance: guarantees, interest rate and fee subsidies to banks, equity funding in start-up enterprises, seed capital, direct lending, consultancy and training, information services, export promotion, and other business development services. Promoting women's entrepreneurship has become a government priority, reflected in its gender action plan. 18 Prize awards, loan guarantees, and access to training are being implemented through the SME DNC. 15. The SME DNC was established in 2002 and is supported by the state budget (more than AMD2 billion since 2002). 19 It is governed by a board of trustees headed by the Minister of Economy. It has 30 staff members at headquarters in Yerevan, and 45 staff in 10 regional offices located in each of the marzes (provinces). The SME DNC implements the support to MSME development, 20 including the hip development agenda, and is responsible for development partner coordination. MSME needs for financial and business development services, especially those of women businesses, far exceed the SME DNC s current staffing, technical, and financial capacity. D. ADB Sector Experience and Assistance Program 16. ADB provided support to the SME sector (i) in 2007 with the $3 million Micro and Small Enterprise Financing Facility, 21 and (ii) in 2011 with the $65 million Small and Medium-Sized Enterprise Finance Program 22 to facilitate access to finance and promote broad-based growth. TA supporting improvement to the business environment is ongoing. 23 Preliminary lessons learned from these programs suggest the need to provide funding in local currency to support MSME borrowers, 24 and to support MSME borrowers with training and capacity building to develop a creditworthy pipeline of projects for the banks. The Women s Entrepreneurship Support Sector Development Program will complement these interventions with an integrated approach to support women in businesses including training and consultancy support and an improved business environment providing longer and more favorable terms for lending to MSMEs and mitigating the currency mismatch by providing funds in local currency. 17 The strategy was finalized in the second quarter of 2012 and is expected to be adopted by the government before the end of Government of Armenia On the Approval of the Policy Concept Paper; 2011 and Gender Policy Action Plans. Yerevan. 19 In 2011 and 2012 the SME DNC received AMD150 million yearly (equivalent to $375,000). 20 The SME Universal Credit Organization (SME UCO), a joint-stock company established by the SME DNC, provides direct lending and equity financing, targeting mainly medium-sized companies. Other government-supported institutions are the Gyumri Economic Foundation, which promotes start-up companies to transform Gyumri into a technological city, and the Enterprise Incubation Foundation, focused on ICT development. 21 ADB Micro and Small Enterprise Financing Facility. Manila. The facility provided $3 million to Inecobank in Armenia. 22 ADB Report and Recommendation of the President: Proposed Senior Loans to the ACBA-Crédit Agricole Bank, Ameriabank, Ardshininvestbank, Inecobank. Small and Medium-Sized Enterprise Finance Program. Manila. 23 ADB Technical Assistance to Armenia for Institutional Modernization to Improve the Business Environment. Manila. This TA supports the development of an online business registry. 24 Financial Analysis (accessible from the list of linked documents in Appendix 2).

5 5 Problem Tree Slower economic growth Increasing poverty rate of women Economic participation of women is below potential Development Problem Women entrepreneurs have limited business skills and knowledge (planning, product development, market information, networking, taxes, insurance, etc.) Limited use of financial services by C a u s e s SME DNC lacks capacity to increase outreach to women's SMEs SME DNC lacks capacity to increase and take risk on women's SMEs Banks have limited experience in engaging with women entrepreneurs and SMEs Banks not able to mitigate foreign exchange, interest rate, and tenor mismatch risks when lending to SMEs The business environment is not conducive to entrepreneurship and to the formal creation and growth of SMEs Women have limited access to collateral Learned social behaviors based on a patriarchal societal structure limit confidence and development of entrepreneurial attitudes among women SMEs = small and medium-sized enterprises, SME DNC = Small and Medium Entrepreneurship Development National Center,

6 6 Sector Results Framework (Micro, Small, and Medium-Sized Enterprise Sector, ) Country Sector Outcomes Country Sector Outputs ADB Sector Operations Indicators with Planned and Targets and Outputs with ADB Indicators with Ongoing ADB Baselines Contribution Incremental Targets Interventions Outcomes with ADB Contribution Increased number of women business owners and businesses with a majority of female workers and females in management Increased share of SMEs in GDP Baseline:43.0% (2011) Target: 47.0% (2020) Increased share of new businesses that are registered by women Baseline: 3% (2010) Target: 20% (2017) Improved institutional framework supports and MSMEs Improved capacity of and MSMEs Improved access to finance by women MSMEs Improved business environment supports MSMEs MOE implements at least two action plans linked to the national strategy for small and medium-sized entrepreneurship development targeted at and MSMEs by 2017 Number of women MSMEs that receive training and business development services from SME DNC annually increases from 2,174 in 2011 to 3,500 in 2017 At least 2,600 new loans under the program from PFIs to MSMEs, of which at least 50% should be women MSMEs by 2017 Doing Business ranking improves from 55 in 2012 to 50 in 2017 Planned key activity areas MSME support policies and business environment reforms (50% funds) Liquidity line for PFIs (commercial banks and UCOs) (50%) Pipeline projects with estimated amounts Women Entrepreneurship Support Sector Development Program ($40 million) Ongoing projects with approved amounts SME Finance Program PSOD ($65 million) Main Outputs Expected from ADB Interventions Planned key activity areas At least 2,600 new loans from PFIs to women entrepreneurs and SMEs Ongoing projects Increased lending to SMEs $65 million of SME loans is made by 2014 Number of SME customers increases 25% for each PFI from 2012 to 2014 ADB = Asian Development Bank, GDP = gross domestic product, MOE = Ministry of Economy, MSMEs = micro, small, and medium-sized enterprises, PFI = participating financing institution, PSOD = Private Sector Operations Department, SME = small and medium-sized enterprise, SME DNC = Small and Medium Entrepreneurship Development National Center, UCO = universal credit organization. Source: Asian Development Bank.